K&L Gates on the Effect of CFTC Rule Proposals on Funds

As we mentioned in our January 31, 2011 post, "CFTC Proposes Commodities Rules that May Affect Mutual Funds," new rule proposals by the regulator may, if adopted, subject some mutual funds to greater regulation. Under current CFTC rules, registered investment companies are generally excluded from the definition of "commodity pool operator." The rules proposed on January 26 would change that exemption such that registered investment companies (RICs) with greater than "de minimus" investment in commodities be required to register with the CFTC as "commodity pool operators."

Expanding the discussion, K&L Gates has issued a client memo outlining the rule proposals and laying out some of the potential effects of these regulations on private fund, should they be adopted. Though the memo focuses on the potential changes for private funds not mutual funds, K&L's discussion is helpful in understanding how disruptive to the fund industry generally these new regulations could prove to be.

If adopted, the CFTC's proposal to rescind the Private Fund Exemptive Rules would require operators of private funds that wish to continue or begin trading futures contracts, commodity options, and - as of July 16, 2011 - swaps (together, "commodity interests"), to register as CPOs. Likewise, if adopted, the CFTC proposal would require certain advisers to private funds that continue or begin to trade commodity interests to register as CTAs. Importantly, as of July 21, 2011, many of these advisers will also be subject to investment adviser regulation by either the Securities and Exchange Commission ("SEC") or one or more states. As a result, if the CFTC's proposal is adopted, advisers to private funds that trade commodity interests likely will be subject to dual SEC/CFTC regulation.

The memo helpfully sets forth some of the issues the new regulations would create for funds of all kinds that directly or indirectly trade commodity interests (including swaps and possibly currency swaps and forwards), including dual registration, a lengthy transition period, as well as increased costs of compliance.